Gary Dek is a writer for Gajizmo.com who is always looking for ways to make and invest money. Gary has previously worked for an internet company on their M&A team, as well as in investment banking and private equity.
While an old car may seem to save on monthly expenses since there is no car note and often no collision, comprehensive, or gap insurance coverage premiums, the cost of repairing a car with little monetary value may be greater than the cost to replace the vehicle. Plus there are the awesome benefits of buying a new car, like a 2013 Camaro 2SS, though a car that fast would get me into a lot of trouble.
However, the decision to replace a car may not be easy. As a car enthusiast myself, I struggle with the urge to buy a sports car multiple times a year, but instead opt to invest my cash.
If car breakdowns are making it difficult or impossible for you to get to work every day and putting your job in jeopardy, the car is probably costing you more than a replacement would.
Buying A New Car
While in most cases it is best to buy a late model used car, new car dealers often offer extremely low interest on 60 month loans for qualified buyers, sometimes as low as .9% or 1.9% APR. To be a qualified buyer, you must have excellent credit, which is why it is smart to learn what a good credit score is 12 to 24 months before you plan to purchase a vehicle.
Never finance the cost of sales tax and always have a reasonable down payment ($5,000 or more, if you can afford it) when buying a new car to avoid being upside down in your loan. If you have to drive to work every day, it pays to put money aside each month to cover the down payment since you know you will have to buy one eventually.
When picking a car, choose a make and model that fits your budget and is designed to handle the type of driving you will do. If you drive 20+ miles round trip in traffic on a daily basis, work in an office and don’t transport a boat or ATVs on the weekend, buying a V8 truck isn’t a practical or logical decision.
If you just got a promotion and started making $200,000 a year as an executive at a medium-sized business, do you really need to show the community you are successful by buying a luxury $80,000 car? Just because you can afford up to X dollars per month in car payments doesn’t mean you have to spend that amount. For me, real monetary success is measured by how much money I have in the bank and in investable assets, not the amount I’ve spend on consumer products that will likely never appreciate.
For these reasons, my general rule is: if I don’t absolutely need a new car because my current one is unreliable, I will only purchase one if I could afford to pay 100% cash, or pay off the note within 6 months. This doesn’t mean that I will necessarily use cash to buy a car – I will most certainly finance it so that I can continue to invest my cash at a higher rate of return than my car note (the S&P did return approximately 16% last year).
This just means that, unless it’s a dire situation, why purchase a $50,000 unless I have, for example, $500,000 in investments, where 10% of my net worth would not make a big difference to me. However, I understand everyone’s threshold and financial situation is different, so apply a budget given your own personal preferences. Just remember, don’t be one of those people I see in Los Angeles or Orange County who drive a luxury Mercedes or BMW but pull up to a low-rent apartment building.
Keeping An Old Car
Even with regular maintenance and good care, cars parts wear out over time. If a car requires more than one major repair in a six month period, it is probably time to replace the vehicle. The cost of major repairs is likely to exceed the price of multiple car payments. The exception to this rule is if you can perform the car repairs yourself. The biggest cost of car repairs is not usually parts – it is labor. If you are able to do your own car repairs or have a mechanic friend who cuts you a brake on his labor rates, you can probably save enough to keep your old car out of the scrap yard.
If you do have to get rid of your old car, you have some options to consider. If it is running, you could sell it privately or use it as a trade in to cover part of a new car down payment. Here are a few basic tips on how to trade in your car:
Choose the same maker’s dealership to trade into – the dealer is more likely to purchase your vehicle for their own lot, which means more profit for them, instead of trying to broker and sell it at wholesale.
Wash the car and clean the interior – presentation is important.
Timing is essential – buy a new car right before the next model year releases.
If different counties have different sales tax percentages, travel a bit and buy from lower sales tax areas. Even half a percent can save you several hundred dollars.
If it is not running, you can scrap it at a recycling center which will pay you money based on the weight of the car. Charitable organizations like Good Will and the Red Cross take cars, even ones that don’t start or work anymore, as donations and this option provides an income tax write off as long as the organization qualifies for non-profit status with the IRS. Be extra careful and detailed with documentation of this transaction because donations and charitable giving are a common area of fraudulent deductions and may increase your chances of an audit.
Some people will spend ridiculous amounts of money on repairs because they feel a sentimental attachment to a particular car. If the car is constantly in the shop, it is a drain on your budget and needs to go (or stay parked in your garage). Keep pictures of the car, but trade it in, sell it, or scrap it and buy a car that is dependable.
Finding A Middle Ground
New cars are expensive and if you do not qualify for special interest rates, car payments can be overwhelming. If you cannot afford a brand new car or if you do not qualify for special deals from dealers, a certified pre-owned car often has a lower price tag and a warranty. Some people have mixed feeling about buying a used car, but there are certain steps you can take to ensure you protect yourself.
First, cars that are 3 or 4 years old are generally 25% to 40% cheaper than their brand new counterparts, so paying a few hundred or couple thousand dollars to service a vehicle over the next 5 years is a bargain.
Second, avoid buying the wrong car that turns out to be a lemon. Always purchase a vehicle with low mileage or light use. The average driver puts about 12,000 to 15,000 miles on a vehicle per year. A car that is 3 years old should have no more than 40,000 to 45,000 miles on it; otherwise, you are looking at a vehicle that may have significant wear and tear issues down the line.
Third, inspect the interior and exterior. Minor aesthetic issues are normal and generally mean the previous owner took care of their vehicle. Carpet stains, cigarette burns, a loss of gloss on the paint, and dents or noticeable repair work could indicate that the car was heavily used with minimal attention to its condition.
After you finally decide on a vehicle, but before you automatically finance the car through a dealership, consider asking your own bank for a loan. If you are a good customer, your bank or credit union may offer you a better interest rate than a dealership. If at all possible, avoid “Buy Here, Pay Here” lots. Not only are the cars usually overpriced, the interest rates are at the higher end because these dealers cater to people with bad credit.
Another way to help beat the high cost of auto repairs is to buy a private auto warranty from a company that specializes in this type of coverage. Warranties may not be available for old cars, but if you buy it on a late model vehicle, you can usually renew the warranty yearly. Warranty insurance can be worthwhile if you put a lot of mileage on your car and this car repair insurance pays for most major repairs. Be sure to read the fine print since some warranties only cover drive train repairs, and these are the parts least likely to break down or wear out. I only mention private warranty coverage because it is an option that may be suitable for some, but I wouldn’t recommend it. As always, if the deal is too good to be true, buyer beware.
What about you? Do you have an old car or new car? Why?